Startups are exciting because in this type of business, the primary goal is to provide various solutions to problems. With the right balance of professional, creative and technical skills put together to produce innovations, it is a lucrative opportunity that signals a positive business growth. However, the buzz of bringing forth answers to every problem could easily die down if the revenue is not sustained in the process; startups may get easily overwhelmed due to the lack of experience and eventually make unfavorable business decisions.
Revenue forecasting is very essential for startups because given the fast-paced dynamic nature of this business, the outflows may easily overcome the inflows, which the investors would surely take as inability to sustain it long-term (therefore losing their trust and your credibility).
How do we avoid these results? Read on for some tips on making accurate revenue forecasting:
Forecasting expenses over revenues
Startups literally shout “beginning,” so it’s easier to do early forecasting on expenses over revenues. Plan ahead for fixed costs (rent, payroll, bookkeeping, legal/insurance/licensing fees, advertising etc.), variable costs such as Cost of Goods Sold (materials/supplies and packaging) and Direct Labor Costs (customer service, direct sales, and direct marketing.)
Handy tips in forecasting expenses include: 1) doubling your advertising/marketing cost estimate, 2) tripling you legal, insurance, and licensing fee estimate, and 3) keeping track of your direct sales and customer service labor expenses. Doing all these could help you anticipate ballooning and/or fluctuating costs.
Striking a balance between conservative and aggressive revenue forecasting
Having both conservative and aggressive revenue projections could propel your startup company to that sweet spot between aiming high and being realistic. You may be conservative at first with revenue projections on pricing point, marketing channels, staff and new products/services, then make an aggressive projection by increasing the values for some or all of these factors (e.g. having one product/service released every year for the first 3 years vs. one product/service released on your first year, then gradually rolling out more than 4 products/services for the next 2 or 3 years).
Checking key ratios for sound revenue projections
Once project planning commences, it would be very easy for startups to lose track of expenses. As a young company, there is also a possibility for startups to assume that revenue goals could cover all expenses. To avoid this juvenile mistake, one should check for key ratios to reconcile your revenue and expense projections.
Here are some key ratios you might want to consider, as well as how they affect your forecasting.
- Gross Margin. This can determine if you have become overly aggressive with your total direct costs and total revenue projections. Reconsider your projections if your gross margin reaches 10 to 50 percent.
- Operating Profit Margin. This is the ratio of total operating income to net sales, and measures the pricing strategy and operating efficiency of a company. One key takeaway here is to remember that overhead costs should represent a portion of total costs as your revenues grow. This is what startups overlook this and they forecast break-even point early on, and become too confident that financing is not very necessary to get to this point.
- Total Headcount per Client. The ratio of your total number of employees to the total number of clients could be a good indicator of your preferred future for your company. Let this be your starting figure; consider how many clients and processes you could handle in five years and re-check your projections when it comes to payroll and revenues.
D&V believes in accurate and sound revenue forecasting for your startup business. Do you want to know more about forecasting? Click here to take a good look at the services we offer at D&V.